Maxim Integrated reported disappointing fiscal fourth-quarter results and gave an even gloomier outlook for the September quarter, due to sluggish demand for handsets from Maxim’s largest customer, Samsung. We will likely cut our fair value estimate by about 10% to $30 per share, but maintain our wide Morningstar Economic Moat Rating, as we view Maxim’s 25% operating margin in the soft June quarter as a strong indication of the firm’s ability to retain pricing power from its proprietary analog chip designs. Revenue was $608 million, flat sequentially but below the low end of the firm’s forecasted range of $610 million to $640 million put forth in April. Sales were up 0.5% both sequentially and from the year-ago quarter.
Maxim profited from strong analog chip demand from medical, smart meter, and automotive customers. However, consumer-related chip sales were down 10% sequentially, mostly due to inventory corrections at Samsung. Sales of Samsung’s older Galaxy S3 and Note II models fell sharper than expected, leading to fewer new chip orders placed with Maxim. Meanwhile, Samsung’s flagship Galaxy S4 launched in the June quarter, and while Maxim saw a boost in chip orders early in the June quarter as production ramped up, orders later in the quarter were slashed as S4 sales to end customers were lower than anticipated. The bigger disappointment came from Maxim’s September revenue forecast in the range of $570 million to $600 million, which was far below our expectations and would represent a 1% to 6% sequential decline.
Looking at Samsung, Maxim’s shortfall in the June quarter and soft outlook for the September quarter appear to stem solely from inventory corrections, as dollar content and pricing per device was in line with expectations. Samsung itself reported earnings this evening, and is calling for revenue growth from its smartphone business, so it appears that the handset titan plans on selling devices that were already built in the June quarter. We should note that Samsung’s inventory on its balance sheet (which includes much more than just smartphones) rose 11% sequentially and represents 62 days on hand versus 52 days at this time last year. Additionally, Samsung is notorious for making chip inventory adjustments in the December quarter at the end of the holiday season, and despite these adjustments in the summer months, Maxim can’t rule out further sluggishness at Samsung later this year. In short, 33% of Maxim’s revenue came from Samsung as recently as March, but should dip below 20% in the September quarter.
The sharp decline in Galaxy S3 and Note II demand in June was especially surprising. Maxim (and Samsung) was likely expecting a more favorable product mix where it not only saw robust S4 demand, but also solid demand for older flagship models like the S3 and Note II. Instead, it appears that customers who didn’t buy the S4 traded down even further and bought midrange phones in the $400 range, or perhaps phones from competitors, rather than the S3 in the $500 range. By comparison, we think that Apple’s AAPL iPhone mix is split about 50/50 between its flagship model (i.e., the iPhone 5 today) and older models (iPhone 4S and 4). Furthermore, Maxim also has modestly more dollar content in a Galaxy S3 than the S4, also weighing on nearterm revenue. Maxim also has less dollar content in a midrange phone than the S3 or S4, as the firm has focused its engineering and sales resources on winning high-end phone designs. Some, but not all, of this analog content may be re-used by Samsung in mid-range phones, but lower dollar content per mid-range device means that a rise in Samsung’s sales of these products may have a muted effect on Maxim’s revenue.
Results from Apple and Qualcomm were solid, but not spectacular, and in line with our thesis that, while premium smartphone growth is slowing, the high-end of the market isn’t dead yet. In this context, we view Maxim’s results and Samsung’s inventory corrections as potential company-specific misjudgments in demand, rather than a structural problem. Maxim’s results appear to mirror Broadcom’s disappointing second-quarter results, as they suffered from lower wireless baseband chip demand from Samsung, likely for mid-range devices. However, we anticipate that Maxim’s business from Samsung can bounce back down the road, and Maxim hinted that it expects revenue growth from consumer in calendar 2014 versus 2013.
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